Private online lending deserves credit

Yuan Chenglong, 24, was struggling with his cash flow. He needed 50,000 yuan (US$7,900) to buy the tea and snacks, from the mountainous area of Hunan province, that he sells online.

Meanwhile, Yang Jie, 32, an office worker in Shanghai, was looking for a new investment. So she lent Yuan 300 yuan.

The two had never met.

Yuan and Yang are members of Ppdai.com, a Shanghai-based website that facilitates loans between strangers, an arrangement known as peer-to-peer lending.

The information-sharing and collaborative applications known as Web 2.0 have breathed new life into lending in China. Following the models of Zopa in Britain, Prosper.com and Facebook's LendingClub in the United States, a few hundred similar websites are operating in China.

However, in a country with more than 500 million Internet users, no one has a clear idea of how big the business is. Insiders are advocating that it be brought into the sunlight through the legalization of private lending.

For Yuan, the good news is that he no longer has to borrow money from relatives and friends. His business on Taobao.com, which is similar to eBay, is doing well and draws good customer reviews. "I can't go to the bank and say hey, look, my online store is doing well, please give me some money," Yuan said.

The owners of many small and medium-sized enterprises in China share that problem and have turned to private lending for help. In Yuan's case, unable to provide collateral for a bank loan and then wait months for approval, he searched online and found the peer-to-peer website.

Money from strangers can be available to him within three days. "I've borrowed a total of 300,000 yuan from the website to solve my cash-flow problems," Yuan said.

'Countless' borrowers

As for Yang, "I was nervous at first when I lent my money to several strangers." But the average annual return of 12 percent is much better than that of the stocks she invested in.

Yang joined the website three years ago on a friend's recommendation and invested 3,000 yuan just to "try something new". She has also invested in the stock market and gold.

Now she has more than 200,000 yuan out in active loans to "countless" borrowers. "I used to text my borrowers or call them when they were a few days late on their payments," Yang said. "Now, with so many borrowers, I don't really have the time to call them anymore."

She explained that with a lot of active loans, she manages a good return even when some loans go bad.

The website makes money by charging a 2 percent or 4 percent closing fee from the borrowers, based on the length of the loan, six months or a year. It also collects fees for late payments from borrowers. When a loan payment goes 60 days past due, the website uses part of the closing fee to compensate the lender for the default.